Fluor Corporation (FLR) Earnings Call Transcript & Summary

Good morning, everyone. This is Jamie Cook, and I am the machinery as well as the engineering and professional services analyst at Credit Suisse. I'm very pleased to have with us this morning Fluor Corporation, and we have David Constable, who's the Chief Executive Officer; Joe Brennan, who's the Executive Vice President and Chief Financial Officer; as well as Jason Landkamer, who heads the Investor Relations efforts. So thank you all for being here today. And I guess I'll kick it off with questions. If anyone does have a question, you can e-mail me at [email protected]. If not, I will take it away.

So David, I guess I'll start off with just your commentary on backlog and new award activity. Based on the timing of awards and revenue borne, which quarter do you think investors should think Fluor's backlog bottoms? And can you size sort of the award potential in the back half of the year? And then I guess a follow-up on that is, are you seeing any risk to awards just because of material cost inflation?

Thanks, Jamie. Good morning, everyone, and good to be with you. Thanks for taking the time to call in. Jamie, as you know, we've been very focused over the past several quarters on high-quality new awards. And the good news is that we've got a very robust pipeline of opportunities that across our business lines that fit our skill set and our risk profile. And we're encouraged by what we're hearing from clients generally as they discuss their CapEx spending for the first part of '22 and beyond. And so from a bottoming out perspective, I anticipate a backlog bottoming. It's really a timing of this very, very large Y12/Pantex award that was just received early...

Congrats on that.

Thank you. Thanks very much. Hopefully, we can talk a little bit more about that later in the discussions, but...

We will.

But I think because of that, you can argue that, again, based on timing and when we take that up, backlog will be bottoming either in Q4 of this year, this quarter or early in Q1. So that's how we're looking at it as far as backlog go and going forward, we're pretty excited about. You know we've got billions and billions of prospects that we'll talk about here in a minute as well. So inflation, it remains a concern, obviously, but clients are spending additional time as we've talked about in the past, doing the due diligence with Fluor's help to develop inflation mitigation plans. And we just want to make sure we get those estimates right so that the clients' rates of returns and their economics are solid and we can go forward with good, final investment decisions on the client side. And again, with the majority of our prospects, primarily reimbursable costs, we're also in good shape from that perspective as well.

Okay. And I want to talk about the broader prospect list, but because you brought up the Y12/Pantex, I do want to talk about it. I know that was something that you said it was an important award to look out for, for the next couple of months. So can you just size the contract for us, the risk -- or the contract structure and how to think about potential EPS accretion associated with this award? Obviously, this probably gives you some good earnings visibility, I would assume, which is a positive for the story.

It's just a great, great award for us. We've been tracking it and working it for years now. And it's just a great strategic fit. It's a very large, reimbursable project. And we've had a very long and successful relationship with the DOE. This is the DOE's National Nuclear Security Administration Award. And we've had a number of projects that we've been working on with the DOE very successfully. So yes, very strategic. Plus, it's one of -- I'd say that one of the most coveted, one of the most important government contracts out there. So it's -- as you look across -- from a government contracting business, very, very important. It's a multibillion-dollar award over 5 years. And it's followed by five 1-year options. It's approximately $2.8 billion of revenue annually. We are in the lead. We'll fully consolidate it. And so you can look at $14 billion of revenue for the first 5 years, again followed by another $14 for the following 5 years, but they'll be taken up on 1-year options in that second 5-year period. So that's where we're at. It's Pantex, Amarillo, Texas is nuclear weapon assembly/disassembly and life extension. And then Y12 over in Oak Ridge is the National Security Complex that's been running since 1943. So headcount-wise, Pantex is going to be about 3,000, Y12 is about 6,000, and our management across both sites will be somewhere around 100 folks. So again, pretty exciting. And it's -- there's a transition period. We'll be starting here immediately and transitioning over the next 4 months with the current contractor.

Okay. Great.

Jamie, just to add, you had asked about bottoming out of backlog, depending on the timing of the award, if that comes in, in Q4, then I would suggest that our bottoming of backlog was Q3, sort of rearview mirror. And if it goes in, in Q1, then Q4 will be. But with the award of $14 billion, I think we have secured the timing of the bottom and either...

Okay. And Joe, what I assume -- I don't know if you can speak to this, if you can't, fine. But margins in the targeted government sort of margins...

Yes. through 2021, I think we've laid out that 3.5% to 4%, and we would expect to see that close out for 2021. We're in the process of going through operating plan right now, Jamie. We'll have a pretty good indication when we give our February guidance as to what those margins will look like moving forward. Just another note, we are fully consolidating the Pantex opportunity for which we're a 60% partner, 60-40 split. But we have -- we're taking the full revenue through our books.

Okay. Well, congrats on that awards, but -- on that award. And David, I wanted you, I think you talked about on the last earnings call sort of the $45 billion in new prospects that you were looking at that could come in the next 12 months. You obviously got the Pantex/Y12 award. But can you sort of break down that into the different chunks of end markets, whether it's mining, sort of traditional energy, energy transition, infrastructure? I'm just trying to figure out what the composition of awards could look like and if there's anything else, M&A?

Okay. Great. Thanks, Jamie. The $45 billion that I talked about on the earnings call is for work we are pursuing over $50 million. So there's a heck of a lot more underneath that $50 million threshold. But the $45 billion is, we're talking about full project, full service management operation contracts. We're not talking about studies in pre-FEED and FEED work. So these are engineered procurement or EPC or EPCM or management operation contracts, services contracts that we're looking at. So just to give you context there. And the prospect mix on those full projects by business segment, you can think about Energy Solutions at 20%, Urban Solutions at 45%, and Mission Solutions at 35%. However, that 35% includes about $11 billion of factored award for Pantex. So you'll have to back that out and then you would see those percentages growing. You can do the math, obviously, the Energy Solutions and Urban Solutions growing above the Mission Solutions. And so that's where we're at. It's spread nicely, Chemicals and Energy Transition, Energy Solutions, obviously, figures in that. Energy Solutions 20% and Mining and Infra -- Mining being the largest by a long -- quite a margin, but Mining, Infra, and ATLS come in very strong to support that 45%. That forecast prospect mix is consistent with our strategy of 70% of revenue coming from nontraditional oil and gas by 2023. So that's how you should look at it. And as we said before, remember that 91% of those prospects are reimbursable.

Okay. And the 91% reimbursable, is that just a function of Fluor being more selective? Or is it a function of the competitive dynamics improving?

So again, strategically, that's where we want to be. It's a combination of our selectivity, along with the type of contracts that we're going after. So it's both. And in reality, for the most part, the majority of our -- again, the majority of our markets today, as you can see, 91%, are historically cost plus, with the only exception being Infrastructure. So -- and the only ones we'll look at on a fixed price basis outside of Infrastructure are ones where we're negotiating on a sole-source basis or an open book basis, where you get well into the project before you close the books and reduce your risk that way. And yes, we're not interested in competitive lump-sum opportunities, like I said, other than in infrastructure. I can say even then, with all -- with the infrastructure bill and hopefully spending that -- those funds efficiently, we're seeing contract models in Europe in infrastructure starting to shift to more collaborative contracting models that are in a phased approach that really reduced the risk for all the participants as you work through that and get cost and schedule certainty and accuracy before closing the books.

Okay. And then I did get a question online that I wanted to bring up. The question was you talked about Stork on your last call that final bids were due I think at the end of November, is there any sort of update that you can provide on Stork?

Yes. Joe can take us there. Joe?

Yes. No, thanks for the question. We currently have received 3 of the 4 bids. We're waiting on 1 additional bid, which we should be receiving here in the next couple of weeks. We'll go through the evaluations and then ultimately come to a conclusion on how we're going to move forward and with whom we're going to move forward. So I would suspect that we believe we're still on track for a Q1 conclusion to that process.

Okay. And then just continuing -- I wish we had more than 30 minutes. David, on the Mining side, it sounds like there's a big chunk of awards coming there. Can you talk about where by commodity you're seeing the most -- commodity and geography where you think these awards will come from? And is the margin profile consistent with Urban Solutions? And then I mean, when I think about these projects, are the mining projects, is it sole-sourced? Is it sort of yours to lose, i.e., the only reason you don't get the award is because the project doesn't move forward versus a competitive bid situation?

Yes. Thanks, Jamie. Yes, just to start off with you, you remember, we've been talking about all that front-end work that we're -- that we've got in-house for mining, that $28 billion currently in house that, obviously, we fully expect to convert the majority of that. So that -- to your question, definitely, that's what we're looking for it to convert as much of that in a sole-source basis moving from FEED to EPC, EPCM reimbursable, and that's what the clients primarily prefer to do to keep the schedule in good shape. For the next 18 months for mining, just again before we get into your questions, the next 18 months of FEED and study prospects for mining on our radar, key prospects are another $42 billion. So a good, like I said earlier, pipeline of opportunities in mining. Now to commodities and geographies, obviously, we're supporting the energy transition, right? So we've got several prospects for copper, copper and gold. Gold comes along with copper quite a bit. So we've got a lot of copper and gold projects in North America, in South America, as well as Europe. In South America, we've got a key prospect for a greenfield grassroots, 150,000 ton a day copper gold concentrator. It's reimbursable and sole-sourced, to the earlier comment, and we feel positive about that prospect. We've got demonstrated performance as the industry leader in copper concentrators in South America. And again, it's directly aligned with our -- start of the year, our overall strategy was be the preeminent provider of professional technical solutions and getting in early and staying late. So that's working really well in mining. So we've also had significant EPCM prospects in South Africa and Asia. Again, in South Africa, primarily in copper. So our prospects in copper and gold and zinc as well covers multiple continents. For lithium, we talk about lithium getting a lot of interest. Here in North America, we've got prospects in Nevada and we're doing some early scoping work in Europe. So that's where we see mining currently and very excited about it.

And then shifting over to Energy. I think Chevron gave CapEx numbers yesterday, while they were at the low and they were still up, I think, 20% year-over-year. So I mean, are you seeing any -- with the rise in commodity prices, are you seeing any resurgence on traditional energy? And then can you talk about what you're doing sort of on the -- or what we could expect on the energy transition front in terms of awards?

Yes. It's a bit of a moving target, right? Exxon came out this morning and guided CapEx a little bit down for the next 5 years. I don't know if you've seen that yet. And they were pointing to COVID uncertainty. So it's just -- it's a balancing act. So from the majors, as we said before, it's still early days for energy transition to take hold. But our customers are going to be spending money there. They say carbon capture, sequestration and decarbonization, electrification, along with the renewables and the battery spend is going to be part of their future. So we're remaining optimistic on energy transition. Starting to see signs, like you said, you mentioned Chevron, they're signaling $10 billion in energy transition through 2028. And ExxonMobil's, I think, got $15 billion committed through 2027. And then Shell and BP and Total are -- a variation on a theme, but somewhat similar paths as well. So we do expect to see energy transition spend starting to ramp up. And you talked about...

And David, one question, follow-up on that. Because like historically, everyone thinks that Fluor in traditional energy dominating, but because it's the customers you work with. Like on energy transition, will you still be able to dominate because it's working with the Shells or the Chevrons, you know what I mean? Like, is this a customer matter more than what the project is?

I think we are the leader in energy transition, Jamie, just because of our history and our fairly agnostic view on all technologies and keeping abreast of technologies and being able to offer the best technology, the right horse for the right course. And so we cover carbon capture and sequestration with proprietary technology, I might add, both pre and post-combustion. So that's very important going forward. Renewable fuels, very strong there, blue and green hydrogen and battery chemicals, green ammonia. And then asset decarbonization and electrification are very strong. We've got over 150 subject matter experts that cut across energy transition. And that's not even talking about our nuclear power project capabilities and leveraging the small module reactors at NuScale and their proprietary technology, industry-leading by the way. But I do want to talk about your traditional oil and gas comment a little more. It's hard to imagine with the strength of commodity prices that they may just won't be considering more traditional oil, gas and chemical projects. I mean chemical margins are so high right now. All guidance at our chemical clients are on the increased margins and earnings. So we don't want to miss out on mentioning chemicals as well. But again, as you know, everyone is feeling the pressure of energy transition and the focus on lowering carbon emissions. But to give you a better feel for that work. Of the $158 billion in front-end work we're chasing right now, we've got 200 prospects over the next 18 months. So that $158 billion of front-end work, from an oil and gas chemical perspective, that makes up about $105 billion of that $158 billion. So it's still a big number. It's split very evenly between chemicals, upstream and downstream. You could divide it by 3, and those are the prospects we're chasing in those 3 business lines, sorry, business lines, upstream and downstream is the same business line.

Okay. Joe, maybe a question for you. I think it's been a while since Fluor has been raising numbers, I guess, is what I would say. I think this is like the second quarter in a row where we've raised numbers. Some of the questions I do get from investors are that's a positive sign, but I think there's some concern with rising material costs or labor inflation, that there's risk at all to your backlog. Do you think we're behind that risk? Or are we properly thought that through in 2020, we were proactive in terms of the type of risk, so we're behind -- are we behind that -- beyond that?

No, thanks for the question, Jamie. I -- the reality is, I think what we've worked into backlog relative to COVID claims and how we've addressed both escalation and inflation are built into our pricing going forward for the most part. And clearly, change in law and force majeure clauses that we -- that we've employed -- or employed in order for protection at the end of the day is a big key to that. I would say that the majority of our backlog right now is somewhat mature. The majority of our backlog that is of significance is [ bought ] out, is well into construction. So there's probably a limited amount of risk that I would see relative to inflation and escalation moving forward. And as we enter into new awards, we are very sensitive to our contract terms and conditions relative in terms of how we would have fair and balanced contract terms as it relates to both inflation and escalation.

Okay. And then shifting to LNG Canada. It sounds like, at least on the last earnings call, you feel like you're successfully managing LNG Canada. Can you just -- what milestone should we be tracking? I mean in terms of understanding how Fluor is doing on this contracting, can you talk to some of the strategies you've deployed to manage labor successfully, because labor is generally, I think, where issues arise in big projects?

Yes, I'll take that, Jamie. Thanks. So LNGC had a board meeting last night, so up to speed with the latest and greatest there both in Canada and over at the mod yards. And so just as an overview, we've got just over $5 billion in backlog remaining for our portion of that project. And our biggest mitigation for labor is really, as Fluor traditionally does respect, it's respecting and treating all staff and craft fairly. And also the use of our fabrication yards in China, right? It also drives improved labor productivity in a controlled environment. We're also hiring and training indigenous people from First Nations up in Canada. And there, we have a very strong -- very strong track record of training people for major projects in remote locations. So that -- I think that's going extremely well. We've got various vaccine mandates that we run into issues with depending on who a person's opinion of that. But overall, that's going extremely well. From just a staff level perspective, after some initial staffing reductions earlier this year due to COVID, we're now fully staffed on the work that's going on at site. We've got 6,000 at the COOEC yard in China and another 5,400 in CFHI yard, about 4,000 on-site. The 4,000 in site will ebb and flow a little bit depending on where we're at in construction, which is now overall -- not just construction, but overall, the project is about 53% complete as we stand today. And we've offloaded the first modules for 16 modules of 192, right? 157 OSBL off-site battery limit modules and 35 in-site battery limits process units. So to your question about key milestones, I've said it before, right? Module delivery, the site is running really well. We've got good productivity on site, and it's all about module delivery from the OSBL and ISBL yards, and we'll be tracking that. That's what we should be talking about through '22, that progress, and starting to see those modules arrive in Kitimat later next year. So that's again, going well is, I guess, the best way to put it, based on what we heard last night.

Okay. And we have to -- I know we only have 4 minutes, but I might hold you a minute or 2 more because we started late. But NuScale, we have to talk about NuScale because everyone is excited about it. Any update? Like I'm just -- people are trying to figure out how to value this thing. So I know how much you've spent, how much the DOE spent. So how do you think about what -- when Fluor is investing in assets or making acquisitions, what are the return hurdles, and do they apply to NuScale? And then can you provide any update on Guggenheim? And I think you guys and the DOA have invested $1 billion. I'm assuming we can at least make whole on this. Just any framework that you can help us with.

So NuScale is very, very exciting for us, the incoming interest, the outcome of COP26 and an announcement over there with an MOU for a program in Romania. Eastern Europe in general, Romania, in Poland, in Ukraine, in Bulgaria, all very interested. So internationally, NuScale is making great strides, not only in Eastern Europe, but into Asia as well. So it's just a very important carbon-free energy offering that is just years and years ahead of the competition, with the approval from the NRC that no other technology can talk to. So we were out in front and we're very positive about it. From a return perspective on M&A, we go through the standard due diligence activities and just making sure we make wise decisions to get the best returns and -- the best returns that support our strategic financial goals and targets. So you talk about the $1 billion investment from Fluor and the DOE. Certainly, from our side, we are going to be seeing a very reasonable return for our shareholders. That's what we talked about earlier this year in driving the best value forward. But still stay involved to execute the projects and manage the projects with our preferred position as the lead on the projects that NuScale will be working on. So I think that's how we should look at it. I can't say much more on it right now.

Anything on timing?

The timing of NuScale is, I'd say, we'll be coming back to you in the near future to talk more about it. Joe, do you want to talk about Guggenheim at all and just how they've been helping us?

No. Well, Guggenheim -- in bringing Guggenheim aboard, it was along the lines of what is the -- what is the best way to extract the most value out of NuScale and the investment that we've made over time. And we've looked at a number of different alternatives. And as we have begun to narrow down on what we believe is the biggest return to our shareholders, we'll be really excited to be able to come out in the very, very near future to discuss what those -- what those plans are. But I would tell you that internally, we're starting to land on where we believe that value lies. And again, we look forward to being able to communicate that very shortly.

Okay. I'm going to squeeze 2 more in because we are 2 minutes late. So on the last earnings call -- I mean, David and Joe, you can tag team it. But on the last earnings call, you sort of implied greater confidence in achieving your longer-term 2024 targets. So what's driving that? And then, Joe, my question for you is confidence levels. We move forward, free cash flow conversion can sort of -- like how to think about it, is it -- should it be sort of net income? And with this potential, we have Stork, we have NuScale, what are you going to do with your cash, Joe?

I'll let Joe take capital allocation, right? Rightfully so. But let me talk about long-term targets, right? The strategic plan. And as you know, with the dilution we are at, versus the $3 to $3.50, we talked about at the start of the year, $2.50 to $2.90, right? The equivalent. And that earnings power that we've talked about, the confidence. We can -- we're diligent in execution right now, very diligent. Execution is going really well. We're eliminating any further leakage on the zero margin project. So that's -- and we're working that off. By the end of '22, Jamie, we won't be talking about much more in the way of zero margin projects, maybe 1, 1 to 2. And then -- we've improved the quality of projects entering Fluor's backlog. We were down -- well, excluding Pantex, right? And where it falls. But just exclude Pantex for a second, we were down a little bit on our planned new award revenue, but we are above on our gross margin, quite a bit above on gross margin. To give you an idea of what's coming into backlog and working off that [indiscernible] margin is what it's all about. So yes, steady and strong earnings on the back end is what that all is going to drive with execution in those bookings. We've got significant growth potential across all 3 segments, right? Primarily reimbursable. And you couple that with the cost transformation initiative, where we talked about over $150 million of annualized savings going forward, we're going to get a good piece of that in 2022, that will be built into our plans that we're looking at next week. So we're confident in our ability to meet those targets. We'll continue to track that earnings power and adjust accordingly going forward and keep you apprised on that. So that's it on the earnings side, and I'll give Joe the capital allocation question.

Yes. No. Thanks, Jamie. I think when we talked in Strategy Day, we had set some targets out there relative to our debt to total capitalization below 40%. And by 2024, which I think we're -- no, I think I know we're -- we've been able to achieve that in 2021, where we are today. As we looked at the pathways to get to the $3.50 per share, $3 to $3.50 per share, now $2.50 to $2.90 per share, we had a number of different pathways, including through Pantex/Y12 and what David has laid out relative to the mining opportunities and ATLS, more investment in our noncore business and the returns. The first leg of that stool, if you will, has fallen, and we've been able to, when the Y12/Pantex, which is a really great start to us achieving that $2.50 to $2.90 range that we had outlined in 2024. And we're very, very bullish on what's going on in the mining sector. With that, it is going to generate a lot of stability relative to earnings. It speaks a lot to the quality of earnings, and that will translate itself into more consistent cash flow as we move forward. And I would suggest that you could look at it from a net income perspective as to what that cash flow will generate. I think that's a fair benchmark. And what are we going to do with all that cash? Well, a number of things. We had always talked, and I think we laid it out in Strategy Day, of reinvesting into the strategy to unlock the value that's there. And I think you're starting to see that through the award on Pantex/Y12. Some of the activities outside of our noncore oil and gas business, ATLS. And those were things that we had discussed about a year ago. And we will continue to do that. Reinstatement of the dividend will be a discussion as we move forward. So there are a number of different things that we want to look to get the most return on investing cash at the end of the day. And I guess the other thing is we start to work off our problem or challenge projects. Again, we'll be able to see a much cleaner earnings stream as we move forward. So some of that cash will go to servicing, the -- really the significant project that we outlined in the earnings call, which is [ scoring out ]. But we feel very good about where we are, and we do have plans relative to reinvesting and unlocking the value in the business as we move forward.

Jamie, just let me add to Joe's comments, because I don't want to miss it. We've talked about mining and government here today and chemicals and traditional oil and gas opportunities, energy transition starting to ramp up, I don't want to miss ATLS, right? And everything they're having a great run now with -- they've done a lot of great work in data centers and now in Life Sciences picking up, opening technology hubs in Europe to take on the Life Sciences business over there. And then on semi...

I'm yet to ask you about semiconductors.

Semiconductors and chips, right? I mean we're just -- we're definitely seeing increased incoming interest in that area. And we're starting to win some early awards with a major chip manufacturer in the U.S., and we're well positioned for additional work over the next 12 months. So they're just really well positioned in ATLS across all of the different businesses that they're working with right now.

Okay. Thanks for the follow-up on that because I'm yet to ask you about semi CapEx as well. Okay. All right. Well, I've done what I usually do, we're 6 minutes over budget -- I mean, over time, so I asked too many questions. But thank you guys so much for joining us. I appreciate your support. Hopefully, next year, I'll see you in Palm Beach. But if I don't talk to you before, have a great holiday. And thanks again.

Happy holidays. Thanks, everyone.

Thanks, guys.

Bye-bye. Take care.

Bye.